Low Productivity - A Price Paid For Virtue?

For all the cautious common sense behind Mr Hammond’s measures, as he doled out a billion here and a billion there to serve as sticking plaster for the nation’s problems, they could only achieve so much in the face of the forecast decline in GDP. The Office of Budget Responsibility, which is responsible for the official figures, has downgraded its projections radically and they make depressing reading. For this year, growth is expected to be 1.5%, a reduction of 0.5% from the 2% predicted in March. Next year’s prediction is now 1.4% rather than 1.6%. The year after that, 1.3% rather than 1.9%. Then a slow climb back to 1.5% for 2021, roughly three-quarters of what was previously expected and well below the international norm of nearly 4%. What on earth is going on?

There are of course two failures behind this downgrading of the figures. The first is the expected failure by the UK economy to generate output. The second is a failure by the Office of Budget Responsibility, whose previous forecasts seem to have been wrong. That is not a criticism of their competence. Forecasting is a guessing game and assumptions have to be made. Apparently the march assumption which is now regarded as over optimistic related to productivity. Growth attributable to that has been reduced by about 0.7%.

All policy has to be based on predictions. Once upon a time these could be found in the entrails of a goat but in these more scientific times they come from independent entities like the Office of Budget Responsibility. That doesn’t necessarily make them more accurate but oddly it is not accuracy that is most important. Predictions give the background which makes decision-making possible. No predictions: no decisions. It is, of course, helpful if the predictions are borne out by events but normally that is more a matter of luck than of science.

And that of course is the nub of it. The predictions now being bandied about are radically different to those made in March because the OBR’s view of future productivity has changed. Is it now written in stone or could it change again? The answer to that is obvious. You just have to look at the upheavals which the UK will go through over the next few years to realise that everything is in flux. Hard Brexit? Soft Brexit? Good trade terms? Bad trade terms? A new Government? A trade treaty with the US? As the variables swirl around it is hard to be sure of anything. A betting man would simply say that it was unlikely that today’s predictions will prove right. He would be brave to predict whether the figures in a couple of years’ time will be better or worse?

Still it is worth pausing for a moment to think about why our productivity is so low. Britain has suffered less than most from unemployment since the crash of 2008. Is that because employers have preferred to preserve the jobs of their workforces to investing in new equipment which would make them redundant? Does employers’ reluctance to spend, taken together with a remarkable acceptance by workers to accept the erosion of wages and indeed part time working, point to owners and workers combining to keep the show on the road? If so, the low productivity is perhaps a sidewind of something rather laudable.

Whether that is the case or not, there are other factors. The huge uncertainties associated with Brexit must make it difficult for owners and their bankers to risk capital by making new investments. How much safer it must seem to keep things as before, avoiding the big expenditure, albeit at the cost of deferring the reduction in wage costs which will flow from it. If it is all going well at the moment, the cautious manager will put off spending decisions until he can see more clearly. Add to that the effect of low interest rates in supporting “zombie” businesses which would otherwise go to the wall and you can certainly see why conditions favour low productivity.

But it won’t always be like that. In just over a year we should have some idea of what Brexit will involve. The news may be good or it may be bad, something which will depend upon your personal preference. Either way there will come a point when the way forward is reasonably certain and at that stage managers will have firm ground on which they can base their investment decisions. It will be then that they modernise their businesses and one has to hope that that modernisation creates as many jobs as it destroys. How soon will it be? Perhaps one could reverse engineer the answer from the figures produced by the OBR. On the other hand it might be simpler just to sacrifice a goat.

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